Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Neogen Corporation (NASDAQ:NEOG).
Neogen Corporation (NASDAQ:NEOG) was in 13 hedge funds' portfolios at the end of the third quarter of 2019. NEOG investors should pay attention to an increase in support from the world's most elite money managers recently. There were 12 hedge funds in our database with NEOG holdings at the end of the previous quarter. Our calculations also showed that NEOG isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_258232" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the latest hedge fund action encompassing Neogen Corporation (NASDAQ:NEOG).
Hedge fund activity in Neogen Corporation (NASDAQ:NEOG)
At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the second quarter of 2019. By comparison, 12 hedge funds held shares or bullish call options in NEOG a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Noam Gottesman's GLG Partners has the biggest position in Neogen Corporation (NASDAQ:NEOG), worth close to $10.6 million, amounting to less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is D E Shaw, led by David E. Shaw, holding a $6.1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other peers with similar optimism consist of Israel Englander's Millennium Management, Chuck Royce's Royce & Associates and Mario Gabelli's GAMCO Investors. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Neogen Corporation (NASDAQ:NEOG), around 0.71% of its 13F portfolio. GLG Partners is also relatively very bullish on the stock, earmarking 0.04 percent of its 13F equity portfolio to NEOG.
With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, initiated the largest call position in Neogen Corporation (NASDAQ:NEOG). Millennium Management had $0.7 million invested in the company at the end of the quarter. Donald Sussman's Paloma Partners also made a $0.5 million investment in the stock during the quarter. The following funds were also among the new NEOG investors: Karim Abbadi and Edward McBride's Centiva Capital, Steve Cohen's Point72 Asset Management, and John Zaro's Bourgeon Capital.
Let's go over hedge fund activity in other stocks similar to Neogen Corporation (NASDAQ:NEOG). We will take a look at National Health Investors Inc (NYSE:NHI), First Hawaiian, Inc. (NASDAQ:FHB), Plains GP Holdings LP (NYSE:PAGP), and Ingevity Corporation (NYSE:NGVT). This group of stocks' market valuations match NEOG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NHI,15,131310,2 FHB,18,208814,-3 PAGP,18,216040,1 NGVT,20,144120,-1 Average,17.75,175071,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $175 million. That figure was $25 million in NEOG's case. Ingevity Corporation (NYSE:NGVT) is the most popular stock in this table. On the other hand National Health Investors Inc (NYSE:NHI) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Neogen Corporation (NASDAQ:NEOG) is even less popular than NHI. Hedge funds dodged a bullet by taking a bearish stance towards NEOG. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately NEOG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); NEOG investors were disappointed as the stock returned -2.3% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.